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Common ownership along the supply chain and supplier innovations

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  • Chen, Xian

Abstract

Common owners are the (institutional) investors that hold equities of multiple firms. I examine the impact of common ownership of suppliers and customers on suppliers' innovation activities. I find suppliers' investment in innovation, quantity, and quality of innovation output increase when common owners control higher fractions of their and their customers' shares outstanding. The impact of this vertical common ownership on innovation input and quality of innovation output is stronger and more robust than that of the horizontal common ownership. I provide plausible evidence for causality using both a difference-in-differences approach and an instrument variable approach based on a quasi-natural experiment in the form of financial institution mergers and acquisitions. Moreover, I test the potential channels through which the vertical common ownership could influence supplier innovation. My evidence suggests that common ownership increases suppliers' investment in innovation by mitigating hold-up issues between suppliers and customers and enhances suppliers' innovation output performance by improving technological spillovers between suppliers and customers. However, my results also suggest that for suppliers producing mainly capital goods, these positive effects of common ownership on innovation are offset by a negative effect due to vertical creative destruction. Overall, my evidence suggests that common institutional ownership enhances suppliers' innovation performance by improving relationships between suppliers and their customers.

Suggested Citation

  • Chen, Xian, 2024. "Common ownership along the supply chain and supplier innovations," Pacific-Basin Finance Journal, Elsevier, vol. 87(C).
  • Handle: RePEc:eee:pacfin:v:87:y:2024:i:c:s0927538x24002300
    DOI: 10.1016/j.pacfin.2024.102478
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    More about this item

    Keywords

    Corporate innovation; Ownership structure; Transactional relationships;
    All these keywords.

    JEL classification:

    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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